Research & Commentary: Millionaire Tax Would Drive Taxpayers Out of Massachusetts

In this Research & Commentary, Matthew Glans examines Proposition 80, an amendment to the Massachusetts Constitution that would create a new 4 percent surtax on all incomes greater than $1 million.

Proposition 80, an amendment to the Massachusetts Constitution that would create a new 4 percent surtax on all incomes greater than $1 million, will be considered by voters in a 2018 referendum. Supporters call the proposed tax the “Fair Share Amendment” and estimate it would generate an additional $1.9 billion each year to be used for public education and transportation. Critics argue it would make future tax changes difficult, that it’s legally dubious, and that it would make Massachusetts’ income tax rates among the highest in the nation.

In 2002, Massachusetts passed a tax reform plan that gradually decreased the state’s income tax rate in accordance with a set of tax triggers. If passed, Proposition 80 would override the state’s constitutional requirement that the state income tax be set at a uniform rate—allowing progressive or graduated tax rates. The new surtax would increase the rate from 5.1 percent to 9.1 percent for income over $1 million, and it would be adjusted to match inflation. Around 20,000 households in the state would be affected by the new tax, according to the Massachusetts Department of Revenue.

Under the current tax system, Massachusetts households with incomes greater than $1 million, 0.05 percent of the state’s taxpayers, pay more than 29 percent of the state’s income tax, The Boston Globe reports.

The effects of this progressive system are magnified because of Massachusetts’ complex tax code. When tax credits and deductions are included, taxpayers in the lowest income quintile pay an income tax rate of only 0.8 percent, five times less than the rate paid by the highest quintile, notes The Boston Globe’s Jeff Jacoby.

Massachusetts should avoid implementing tax reform through constitutional changes, says Joseph Bishop-Henchman, executive vice president of the Tax Foundation. “A major reason why tax rates are in statutes rather than in constitutions is that constitutions are less flexible to alter in changing situations. If Massachusetts became flush with revenue or if the tax increase turned out to be an awful mistake, it would take another constitutional amendment to change it,” wrote Henchman.

Kari Jahnsen, writer for the Tax Foundation’s Center for State Tax Policy, argues the proposed increase may violate other parts of the Massachusetts Constitution. Jahnsen points out that the Massachusetts Constitution prohibits ballot initiatives from appropriating funding. Since Prop 80 designates the new tax revenue for transportation and education, its constitutionality is uncertain.

The new top rate would also enact the fifth-highest tax rate in the nation on pass-through businesses—making the state less desirable for small businesses and startups. Jahnsen warns that 97.8 percent of all employers in Massachusetts are small businesses and that these businesses employ half the state’s total workforce.

A millionaire tax is likely to produce several negative economic effects in the Bay State. Higher taxes drive wealthy taxpayers out of the state, taking their income, capital, and tax revenues with them. The revenue-generating results of millionaire taxes have been mixed at best; many states that increased taxes on the upper brackets, including Maryland, New York, and New Jersey, have allowed their tax hikes to expire. Relying on a fluctuating tax with a small base—like the millionaire tax—can lead to large budget deficits. In many cases, states with broader and flatter tax systems generate more revenue in a consistent and predictable manner.

Proposition 80 would create an unnecessary burden on Massachusetts taxpayers that would harm economic growth. Instead of increasing taxes on higher earners, Massachusetts lawmakers should focus on making the state a more attractive place for businesses and workers, thus spurring economic development and more state revenue over the long term.

The documents cited below examine millionaire taxes and their history of failing to shore up state budgets and failing to increase revenue.

Millionaire’s Tax Would Revive ‘Taxachusetts’https://taxfoundation.org/millionaires-tax-massachusetts/
Kari Jahnsen of the Tax Foundation examines the proposed millionaire tax in Massachusetts and argues it could have strong negative effects on the state’s economy. “As the Massachusetts legislature considers the so-called ‘Fair Share Amendment’ tomorrow, policymakers would be wise to heed the possible economic consequences of supporting such a large, concentrated tax increase,” wrote Jahnsen.

Seven Myths About Taxing the Richhttp://heartland.org/policy-documents/seven-myths-about-taxing-rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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